Builder 100

Modular Manufacturers Look Past Soft 2011 for Growth

An anticipated shortage of framers could move more contractors toward prefab.

Last month, the modular manufacturer Blu Homes issued a press release about being chosen to build Sunset magazine’s 2012 Idea House. In that 725-word release, Blu identifies itself as a “green, precision home builder,” but doesn’t use the term “modular” once, with good reason.

“Modular” still hasn’t shaken its “mobile home” stigma with some home buyers who think “trailer” first, if they think at all, about factory-built housing. The connection may be completely unfair, as modular homes can be at least as well-made and stylish as stick-built products. But the stigma persists and keeps modular manufacturing from breaking out beyond its sliver of total housing starts in the U.S.

However, if and when the housing market revives, leading modular suppliers are convinced that constraints on skilled jobsite labor and rising materials costs will force contractors and home buyers to give modular a second look. There are even a few modular suppliers with aspirations of becoming legitimate national players.

But first, modular manufacturers and their networks of builders simply need more customers. Last year, production fell by 5 percent to an estimated 12,200 homes, the equivalent of 1.8 percent of housing starts. “We’ve been bouncing along the bottom, like conventionally built housing,” says Fred Hallahan, principal of Hallahan Associates, the Baltimore-based market research and consulting firm that tracks modular construction and trends.

While modular homes are being built in most states, their popularity is still fairly regional. Modular’s share is double digit in some areas of New Jersey and Pennsylvania. In New York, its share rose to more than 6 percent last year, versus 4 percent in 2007–2008. “The increasing demand for quality assurance is what’s driving this,” Hallahan explains. In Virginia, modular represents about 5 percent of production, “and its surge is coming mostly from manufactured-home companies transitioning into modular, although their execution hasn’t quite caught up with their strategy,” he adds. Even in Texas, which has been resolutely resistant to anything but stick-built homes, modular has gone from about 50 homes per year to 300.

However, with overcapacity comes fallout, and last year was no exception. Bend, Ore.–based Fuqua Building Systems, which had been around since 1968 but struggled throughout the recent housing downturn, closed its doors and shut down its plants in Oregon and Missouri. To add insult to injury, the Oregon Department of Consumer Business Services subsequently decertified the company, revoked Fuqua’s license to sell manufactured homes and fined it $155,000 for failing to deliver on purchased homes or refund deposits to customers.

Diverse Products

That’s the kind of black eye the modular sector doesn’t need, especially when modular suppliers are emphasizing the quality and flexibility of their manufacturing and house designs. Take Signature Building Systems, headquartered near Scranton, Pa., which jumped into the top 10 in modular homes shipped last year with a 38 percent production increase to 290 units. Signature’s president Victor DePhillips “has a great vision about his company’s ability to do modular for any project,” says Hallahan. In November, the NAHB’s Building Systems Councils honored DePhillips with its lifetime achievement award.

Champion Home Builders teamed up last year with US Modular to pursue multifamily construction opportunities in Western states. Its recent projects include a $50 million permanent housing project at Fort Lewis in Washington state. Camp Hill, Pa.–based Innovative Building Systems (IBS) has also branched out to commercial construction that includes professional offices and college dormitories.

However, IBS’s focus remains on single-family homes, and last August its Excel Homes brand launched its American Lifestyles series with 14 house plans ranging from 820 to 2,400 square feet, which company officials say are adaptable to just about any U.S. market. In January 2011, IBS announced its acquisition of Indiana-based All American Group. And IBS’s CEO Steve Scheinkman has stated that his company’s goal is to become a national manufacturer and distributor through acquisitions and new plants.

Phoenix-based Cavco Industries, which has produced HUD-code housing since 1965, strengthened its position on the modular front through recent acquisitions of Palm Harbor Homes and Nationwide Homes. Last summer Nationwide completed its 35,000th home, a 1,650-square-foot unit in Axton, Pa. It is currently focusing its attention on urban infill projects. Last summer, it unveiled its Care-Cottages: granny flats designed as quick and affordable alternatives to home renovation. The cottages, which are priced at around $65,000, can accommodate wheelchairs and other equipment to help disabled residents live independently. Nationwide is building these flats in partnership with The VGM Group, a home medical equipment provider.

Forward Motion

While there are substantial numbers of modular manufacturers that produce between 150 and 200 homes each, there’s also a raft of second-tier companies producing 100 or less. Hallahan observes that market leader Clayton Homes is among the suppliers that have expanded by picking up bankrupt competitors. However, he doesn’t anticipate any major consolidations in the near future because “they’ve already occurred.”

That doesn’t mean, though, that modular manufacturers are destined to be trapped in amber for a while. Scheinkman says his company’s financial backer, the private equity firm HIG Capital, is committed to supporting his company’s expansion objectives. And in March Blu Homes raised another $25 million in capital from an investment group led by The Netherlands–based Skagen Group, bringing that group’s total investment in this manufacturer to $50 million.

Waltham, Mass.–based Blu, which has yet to crack into the top 10 of modular manufacturers, definitely has its eye on bigger things. Late last year, the company began producing modules from a 250,000-square-foot former submarine plant on Mare Island in Vallejo, Calif., which at full capacity could pump out 500 homes per year. Blu closed its other plant, in East Longmeadow, Mass., reportedly over a dispute about upgrades with its landlord, but is said to be interested in opening another plant in the East within the next 18 months.

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